Testing Globalization-Disinflation Hypothesis

This paper addresses the globalization - disinflation hypothesis from the perspective of a open economy neo keynesian framework. This hypothesis proposes that globalization has changed the long-run inflation process, resulting in a global disinflation. If true, it makes us wonder about the merit of central banks in this phenomenon. Even more, challenges our knowledge that long-run inflation is ultimately a monetary issue. This paper explicitly addresses this hyphotesis, analyzing how different degrees of globalization change the response of output and inflation to supply shocks. To accomplish this, the use of a general equilibrium approach in which we can identify shocks and openness is a must. Globalization is however, a complex process. In this paper I explicitly model globalization just as an openness process. Simulation results suggest that as long as there is one distortion - free market for assets, the discussion about the changed values of price stickiness measures which would affect the long-run inflation process is of reduced importance. It is also suggested that financial integration, and not trade or competition, is the key to understanding the link between globalization and inflation.Disinflation; Globalization

Communicational Bias In Monetary Policy: Can Words Forecast Deeds?

Communication with the public is an ever-growing practice among central banks and complements their decisions of interest rate setting. In this paper we examine one feature of the communicational practice of the Central Bank of Chile (CBC) which summarizes the assessment of the Board about the most likely future of the monetary policy interest rate. We show that this assessment, known as communicational bias or simply c-bias, contains valuable information regarding the future stance of monetary policy. We do this by comparing, against several benchmarks, the c-bias’s ability to correctly forecast the direction of monetary policy rates. Our results indicate that the CBC has (in our sample period) matched words and deeds. The c-bias is a more accurate predictor of the future direction of monetary policy rates than a random walk and a uniformly-distributed random variable. It also improves the predictive ability of a discrete Taylor-Rule-type model that uses persistence, output gap and inflation-deviation-from-target as arguments. We also show that the c-bias can provide information to improve monetary policy rate forecasts based on the forward rate curve.

Essays in Macroeconomics

This dissertation consists of two chapters on macroeconomic dynamics. The first chapter examines the consequences of technological diversification on long-run growth. I claim that the typical undiversified emerging economy would grow 0.23% faster if it were as technologically diversified as advanced economies. I obtain such estimate by building a growth model in which technological diversification facilitates inventor mobility across sectors, and through it, R\&D. Invention-relevant-knowledge is costly to accumulate, and more importantly, it is inalienable; inventors cannot disinvest cumulative knowledge capital when hit by a bad shock, and cannot sell it. Anticipation to this asymmetric effect leads inventors to refrain to accumulate too much capital. Technological diversification provides a way out. Inventors in a diversified economy can transport themselves to a better sector. A second result of the model is the quantification of the effect of volatility on growth. The model predicts that reducing standard deviation by 1% implies 0.08% faster growth. In the second chapter I extend the sovereign default model in the tradition of Eaton-Gersovitz (1981), to consider the consequences of strategic bailout from a lender country. Default is strategic as debt is not enforceable, and bailouts are strategic, as there is no obligation to extend them. The introduction of this implicit guarantee on sovereign debt has two opposing effects on its pricing. First, spreads are lower because the expected recovery rate is higher. However, if bailouts are a possibility after declaring default, and part of outstanding debt will dilute, then the value of exerting the default option is higher, and these events more frequent. This would raise spreads. I show that bond price schedule is decreasing in the haircut fraction of debt after re-structuring, is bounded from below, and is less sensitive to income fluctuations with the inclusion of a bailout probability. I also show that bailouts are more likely to happen when there are good realizations of income for the creditor economy. A final application can generate spreads close to zero for Italy even when income fluctuations and debt accumulation would predict otherwise. Shutting off the bailout implicit guarantee would have raised spreads from 0.03% to 1.8%

Inflation Targeting in Financially Stable Economies: Has it been Flexible Enough?

The events surrounding the financial crisis and recession of 2008-2009 required significant policy responses by central banks. For formal inflation targeters (IT) a natural question arises about whether IT frameworks were flexible enough to address this unprecedented policy environment. In this paper we tackle this question by assessing the policy responses to the crisis of nine IT central banks that did not face systemic problems in their banking or financial systems. We first document substantial deviations of actual policy responses from prescriptions of conventional monetary policy reaction functions, beginning in the second half of 2008. Although several explanations for the deviations are offered, highlighting the extreme challenges at the time, we can more easily reconcile the findings with a decline in the persistence of monetary policy, again, in all cases. Second, we document the banks’ non-monetary-policy measures adopted at the time, and estimate their impact on local money markets (both in local currency and US dollars) and on exchange rates. While these measures helped broadly to normalize markets, firm conclusions on the effectiveness of specific measures are elusive, owing to the difficulty in comparing the different mix of measures adopted across countries and the significant heterogeneity in specific economies’ responses to these non-monetary policy measures.

A Systemic Approach to Money Demand Modeling

This paper uses a consumer theory-based systemic approach to model the demand for monetary liquid asset holdings. We implement the suggestions and caveats of aggregation theory for the estimation of a demand system for liquid assets (monies) in static, dynamic and time-varying parameters setups. Our results are robust and theoretically consistent with consumer theory restrictions, as system derived from a utility maximizing framework and a well-behaved utility function. In our estimations we find stability of interest-rate and total-expenditure elasticities, in contrast to previous literature. We also document evidence that long (short) maturity rates are associated to less (more) liquid assets and that the vigorous growth of M1 during the last five of years is not accounted for by low interest rates alone. Policy implications are straightforward; there is stable relationship between monies and interest rates, but the former do not respond exclusively to the latter.

Essays in Macroeconomics

This dissertation consists of two chapters on macroeconomic dynamics. The first chapter examines the consequences of technological diversification on long-run growth. I claim that the typical undiversified emerging economy would grow 0.23% faster if it were as technologically diversified as advanced economies. I obtain such estimate by building a growth model in which technological diversification facilitates inventor mobility across sectors, and through it, R\&D. Invention-relevant-knowledge is costly to accumulate, and more importantly, it is inalienable; inventors cannot disinvest cumulative knowledge capital when hit by a bad shock, and cannot sell it. Anticipation to this asymmetric effect leads inventors to refrain to accumulate too much capital. Technological diversification provides a way out. Inventors in a diversified economy can transport themselves to a better sector. A second result of the model is the quantification of the effect of volatility on growth. The model predicts that reducing standard deviation by 1% implies 0.08% faster growth. In the second chapter I extend the sovereign default model in the tradition of Eaton-Gersovitz (1981), to consider the consequences of strategic bailout from a lender country. Default is strategic as debt is not enforceable, and bailouts are strategic, as there is no obligation to extend them. The introduction of this implicit guarantee on sovereign debt has two opposing effects on its pricing. First, spreads are lower because the expected recovery rate is higher. However, if bailouts are a possibility after declaring default, and part of outstanding debt will dilute, then the value of exerting the default option is higher, and these events more frequent. This would raise spreads. I show that bond price schedule is decreasing in the haircut fraction of debt after re-structuring, is bounded from below, and is less sensitive to income fluctuations with the inclusion of a bailout probability. I also show that bailouts are more likely to happen when there are good realizations of income for the creditor economy. A final application can generate spreads close to zero for Italy even when income fluctuations and debt accumulation would predict otherwise. Shutting off the bailout implicit guarantee would have raised spreads from 0.03% to 1.8%

Testing Globalization-Disinflation Hypothesis

This paper addresses the globalization - disinflation hypothesis from the perspective of a open economy neo keynesian framework. This hypothesis proposes that globalization has changed the long-run inflation process, resulting in a global disinflation. If true, it makes us wonder about the merit of central banks in this phenomenon. Even more, challenges our knowledge that long-run inflation is ultimately a monetary issue. This paper explicitly addresses this hyphotesis, analyzing how different degrees of globalization change the response of output and inflation to supply shocks. To accomplish this, the use of a general equilibrium approach in which we can identify shocks and openness is a must. Globalization is however, a complex process. In this paper I explicitly model globalization just as an openness process. Simulation results suggest that as long as there is one distortion - free market for assets, the discussion about the changed values of price stickiness measures which would affect the long-run inflation process is of reduced importance. It is also suggested that financial integration, and not trade or competition, is the key to understanding the link between globalization and inflation

Testing Globalization-Disinflation Hypothesis

This paper addresses the globalization - disinflation hypothesis from the perspective of a open economy neo keynesian framework. This hypothesis proposes that globalization has changed the long-run inflation process, resulting in a global disinflation. If true, it makes us wonder about the merit of central banks in this phenomenon. Even more, challenges our knowledge that long-run inflation is ultimately a monetary issue. This paper explicitly addresses this hyphotesis, analyzing how different degrees of globalization change the response of output and inflation to supply shocks. To accomplish this, the use of a general equilibrium approach in which we can identify shocks and openness is a must. Globalization is however, a complex process. In this paper I explicitly model globalization just as an openness process. Simulation results suggest that as long as there is one distortion - free market for assets, the discussion about the changed values of price stickiness measures which would affect the long-run inflation process is of reduced importance. It is also suggested that financial integration, and not trade or competition, is the key to understanding the link between globalization and inflation

Variations in caffeine and chlorogenic acid contents of coffees: what are we drinking?

The effect of roasting of coffee beans and the extraction of ground coffee with different volumes of hot pressurised water on the caffeine and the total caffeoylquinic acids (CQAs) content of the resultant beverages was investigated. While caffeine was stable higher roasting temperatures resulted in a loss of CQAs so that the caffeine/CQA ratio was a good marker of the degree of roasting. The caffeine and CQA content and volume was determined for 104 espresso coffees obtained from coffee shops in Scotland, Italy and Spain, limited numbers of cappuccino coffees from commercial outlets and several instant coffees. The caffeine content ranged from 48–317 mg per serving and CQAs from 6–188 mg. It is evident that the ingestion of 200 mg of caffeine per day can be readily and unwittingly exceeded by regular coffee drinkers. This is the upper limit of caffeine intake from all sources recommended by US and UK health agencies for pregnant women. In view of the variable volume of serving sizes, it is also clear that the term “one cup of coffee” is not a reproducible measurement for consumption, yet it is the prevailing unit used in epidemiology to assess coffee consumption and to link the potential effects of the beverage and its components on the outcome of diseases. More accurate measurement of the intake of coffee and its potentially bioactive components are required if epidemiological studies are to produce more reliable information